Can good management make you a million?

Paul Summers looks at what qualities investors should look for when scrutinising the management of a prospective investment.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

While successful investing can depend on a vast number of factors — not to mention a degree of good fortune — most market participants would agree that having a skilled management team in charge can be vital if a company is to perform consistently well over the long term. Having a great product or service will only take you so far.

In recent years, there have been many examples of companies being turned around or improved by strong management. Both Tesco and Morrisons appear to be on the road to recovery thanks to the efforts of Dave Lewis and David Potts respectively. Under the direction of Mark Wilson, insurer Aviva finally looks like it might be turning a corner. 

Sadly, it’s not hard to recall plenty of examples of dubious corporate governance. Following revelations over working conditions at its warehouses, Sports Direct managed to alienate many investors during 2016 through engaging in a very public spat with politicians. More recently, both Rolls-Royce and BT have made headlines, with the former agreeing to pay a £671m fine for bribery and the latter revealing an accounting scandal at its operations in Italy.

Just because a company occupies a lofty position in the market doesn’t make it immune to setbacks of its own making.

So, what should you be looking for?

Defining a great leader or team isn’t as easy as it might sound. Although the vast majority of successful companies are led by highly driven individuals, focusing on the personalities of those in charge isn’t always helpful. Steve Jobs reinvigorated Apple and Tim Cooke made it into one of most valuable businesses in the world but their management styles appear very different, as far as we can tell. As a result, it makes sense to concentrate on hard facts.

One thing worth checking is how long a CEO has been in charge. Martin Sorrell has been at the helm of global advertising giant WPP since 1986. Last year, he was ranked second in the Harvard Business Review’s list of the world’s 100 best performing CEOs based on overall shareholder returns and the increase in market capitalisation over his entire tenure. If you’d bought WPP in 1997, your money would have increased seven-fold, excluding any dividends you may have reinvested.

Despite recent tough times, many would agree that Simon Wolfson has also done a stellar job at Next since arriving in 2001. Shares in the retailer five-bagged from 2001 to 2017.  If you’d managed to sell at their peak 18 months ago, you would have multiplied your capital well over nine times, again with dividends excluded. Find the next WPP or Next and your dreams of early retirement may not feel so ambitious. 

Even if a CEO is relatively new, this shouldn’t stop investors from scrutinising his or her track record. Do they have a history of creating shareholder value? Are there any black marks that cause you to doubt their ability?

Another thing worth checking is just how much ‘skin in the game’ management have. You have to question whether a CEO with a relatively insignificant holding in the company will be quite as focused on creating shareholder value as they would be if at least a proportion of their own wealth was at stake. Executive compensation packages that focus more on share awards than bonuses could be an encouraging sign.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers owns shares in Rolls-Royce. The Motley Fool UK owns shares of and has recommended Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool UK has recommended Sports Direct International. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Penny stocks to consider buying while their prices are this cheap

Some of the penny stocks I've been watching have already climbed above the 100p level. But I see potential in…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Revealed! One of the hottest growth, value, and dividend shares to buy today

This high-dividend, low-cost company is also one of the London stock market's most exciting growth shares, writes Royston Wild.

Read more »

Investing Articles

£20,000 in savings? Here’s how I’d target a £2,219 monthly passive income with FTSE 100 shares

Investing in FTSE 100 shares can be a great way to turn a regular investment into a life-changing passive income…

Read more »

Investing Articles

These are the most popular 2024 Stocks and Shares ISA picks so far

After a few tough years, it looks like the 2024 Stocks and Shares ISA season is getting off to a…

Read more »

Investing Articles

This FTSE 100 ETF may be the simplest way to become a stock market millionaire

Ben McPoland considers one very straightforward stock market investing strategy that could lead to a million-pound portfolio.

Read more »

Investing Articles

I’d buy 11,220 Legal & General shares for £200 a month in passive income

Our writer considers how much money investors would have to put into Legal & General (LON:LGEN) shares to target £2,400…

Read more »

Fireworks display in the shape of willow at Newcastle, Co. Down , Northern Ireland at Halloween.
Investing Articles

These 2 magnificent FTSE 250 shares are on sale right now!

These FTSE 250 companies still look cheap, despite recent share price gains. Here's why our writer Royston Wild thinks they’re…

Read more »

Blue NIO sports car in Oslo showroom
Growth Shares

Down 36% in 2024, how low could NIO shares go?

The electric vehicle sector has seen some tremendous volatility in recent years, but what does the future hold for NIO…

Read more »